If you have extra money in your mortgage, get it out now

By Nicole Pedersen-McKinnon

19 August 2018 — 12:15am

If you have any extra money sitting IN your home loan, get it OUT. Now.

This is – and indeed always has been – an unsafe strategy.

First, I have heard a whisper that a major Australian lender is about to sweep away any in-loan savings, which up until now would have been available to redraw, sufficient to get your repayment progress back in line with your contracted term.

Banks can sweep up savings you've stored in a redraw facility.

Photo: Jim Pavlidis

Say you have an extra $50,000 sitting in your loan, but your balance is $10,000 below its scheduled amount. You’d all of a sudden have access to only $40,000 ... the $10,000 would belong to the bank.

How would this situation arise? Obviously if you’d slipped into arrears at some point, although if you’d agreed hardship provisions it would be a bold bank indeed to subsequently snaffle your savings.

A more worrying, widespread potential scenario could be where you’d taken a bank-authorised repayment holiday, perhaps because you’d had a child and your family reduced its working hours for a time.

Offset accounts with an authorised deposit-taking institution are the best place to store extra repayments.

If you’d since diligently stashed emergency cash – the Holy S--- fund I write about often – that could prove to be for your lender’s benefit ... not your own!

Or a longed-for holiday you can no longer take. Or school fees you can’t pay.

As Peter Marshall, product data and compliance manager at Mozo, said to me: “It’s better to have the control over your finances than to be at the whim of whatever rule changes the banks may decide to introduce.”

Any such change would presumably be a bid by a bank to shore up its loan book and protect itself from a possible dip in house prices.

But the second reason to get your money out of your mortgage fast is existing bank fine print.

Few borrowers realise that buried in perhaps five-point font is often permission to effectively freeze your excess mortgage funds if they learn you may get into financial trouble because you’ve, say, lost a job or been taken ill or injured (all the more reason to withdraw any overpayments before telling them).

So how do you instead keep your precious savings safe? It’s long been my advice to house them not in your mortgage itself, but in an offset account attached to it. Such an account gives you the identical interest saving but, crucially, is operated by you and not the bank.

However, regular readers will know that, when this is with a smaller non-bank lender, an offset account doesn’t give you the same protection: indeed, these are the “fake” offset accounts I’ve exposed.

Marshall confirms: “It’s always been a question for me with the smaller lenders where they offer an offset facility but it’s not actually [an offset facility]. The money has to go into the loan itself because they can’t take deposits.”

Bottom line: they’re not authorised to do that. Instead, any “offset” account is just a separately displayed redraw, presumably also ripe for the picking.

For an offset to be the real, protective deal, it needs to be with an authorised deposit-taking institution. Just ask.

Meanwhile, the rumoured bank “sweep” apparently starts in October, suspiciously after the banking royal commission will finish hearings.

CBA systems error misleads interest-only customers

Related Article

CBA has apologised for an email to all interest-only customers that erroneously implied they didn’t need to convert to principal and interest repayments.

“I was delighted to receive an email from CBA informing me that my IO loan was due to expire at the end of August and that I had two choices: do nothing and it would remain an IO loan; or log into to my account online and convert it to P&I,” long-time customer Julie Lamattina told me.

Regardless, CBA’s email featured the words: “Remain on interest only: if you’re satisfied that it’s still meeting your needs – you don’t need to do anything.”

A spokesperson has explained this was meant to pertain to customers who were mid-interest-only term, not at the end of it.

“We send additional communications to our customers when their interest-only loan term is nearing maturity ... We appreciate that the language used in this educational customer email may have led a small number of customers to believe that they could remain in their interest-only period, without taking any action, after it had expired,” she said.

Lamattina’s take on it? “I am sure many people have a loan on ‘set and forget’ mode and they could be seriously disadvantaged by the email.”

CBA has now reworded its email. Be warned: most repayments will automatically convert to principal and interest on IO expiry – and you’ll need to come up with more money.